When your company rarely has cash in its bank account, frequently nears the limit of its line of credit or struggles to pay its bills on time, it likely has cash flow issues that are preventing it from trading normally.
Companies can develop cash flow problems for a variety of reasons. Poor financial management, ineffective invoicing and collections, poor risk management and other factors can all have a negative effect on a company’s cash flow.
Since cash flow is one of the most important factors in business, it’s important that your company responds quickly when its cash flow slows and normal tasks such as paying staff, suppliers and creditors becomes a challenge.
From entering into a CVA to using short-term financing to improve cash flow, there are numerous options available for companies that are struggling with serious cash flow issues.
Is your business affected by poor cash flow? Read on to learn more about the signs of impending cash flow issues, the options available to your business when its cash flow is affected and the potential effects of a serious cash flow crisis.
Quick facts about cash flow problems:
- Cash flow naturally varies for every business, but a serious slowdown in cash flow can affect your company’s ability to pay its staff, suppliers and creditors, potentially leading it towards insolvency.
- Cash flow issues are a serious threat to your company’s financial solvency if it has limited cash reserves, but a wide range of solutions are available if your business is capable of creating a profit in the future.
- Although some cash flow solutions are only available to insolvent businesses, your company does not need to be insolvent to take action and improve cash flow problems.
- Several solutions are available to speed up cash flow if your business is still generating income, such as invoice factoring and discounting.
- The best way to solve a cash flow crisis is to prevent it from happening in the first place by practicing good cash management and understanding the risks that could affect your company.
Why and how do cash flow problems occur?
Cash flow problems can occur for a variety of reasons and affect a wide range of companies. When your company has less cash coming in than it does going out, there is a serious risk that it could eventually run into a major cash flow issue.
While cash flow problems are a serious problem for any business, they’re not the same as insolvency. A company is cash flow insolvent when it lacks the cash to pay its staff, suppliers and creditors when its financial liabilities become due.
A company has cash flow problems when its incoming cash isn’t enough to pay its suppliers, staff and creditors over the long term. Cash flow problems can develop over time, gradually leading your company towards insolvency.
One of the most common causes of cash flow problems is poor cash management and planning. If you’re unaware of the amount of cash available to your company, the risk of facing a serious cash flow crisis is significantly greater.
Another common cause of cash flow problems is ineffective debt collection. When your company offers credit to its customers, it’s essential that you ensure debtors pay on time to ensure steady, predictable cash flow for your business.
Cash flow problems are often the result of a company growing to depend on one or several large customers. If a large percentage of a company’s revenue comes from a single customer, a late payment or default could cause it to develop a serious cash flow problem that could lead towards insolvency.
Finally, cash flow problems can also be the result of a poor business plan that leads to your company generating insufficient revenue. If your company can’t generate its own cash, it will eventually run into serious cash flow issues.
Most cash flow problems can be prevented through effective cash management, risk management and debt collection. Unfortunately, many companies don’t discover the extent of their cash flow problems until a point at which urgent action is required.
Is your company experiencing serious cash flow problems?
Is your company unable to pay its creditors? Has your company reached the end of its line of credit? When your company has no cash and can’t afford to borrow more money, it could become insolvent unless a new source of cash is secured.
Before taking action to end a cash flow crisis, you’ll need to speak to an insolvency expert. If your company is insolvent as a result of its cash flow issues, entering into administration or a CVA could be its best path towards recovery.
Cash flow problems can occur before your company becomes insolvent, and solving them early can prevent your company from using an insolvency solution. If you spot cash flow issues early, the number of options available to fix them is far greater.
Does this sound like your company? If you’re unsure about how to respond to your company’s cash flow issues, there’s no need to worry. We can review your company and offer tailored advice and solutions.
What happens if your company ignores its cash flow problems?
Ignoring cash flow issues might seem like a good short-term strategy, but it could lead to the end of your business. Creditors that go unpaid will quickly start to put pressure on your company – pressure that often leads to legal action.
If your company receives a statutory demand from one of its creditors for a debt that exceeds £750, it faces the risk of being wound up through the courts. As the company’s director, you could also face charges of wrongful trading.
When your company becomes insolvent, you need to take action to maximise the interests of its creditors. Ignoring your company’s cash flow issues will typically lead to aggressive action from creditors and a serious risk of liquidation.
What options are available for companies with cash flow problems?
Luckily, there are numerous options – ranging from short-term loans and factoring to insolvency solutions such as a Company Voluntary Arrangement – available for companies with cash flow problems.
There’s no ideal solution to cash flow issues. The best cash flow solution for your company depends on its current financial condition, its business model, its credit score and the condition of its relationships with creditors.
Below, we’ve listed several of the most effective solutions available for companies with cash flow issues:
Are your company’s cash flow problems the result of long trade credit periods? If your company has outstanding invoices to its customers that can improve its cash situation, invoice factoring could be an effective solution.
Invoice factoring is a process that involves a factoring company managing invoices and collecting payments on behalf of your company. You’ll receive instant payment on 80-90% of the invoice’s value, generating the cash flow your company needs.
Although there are costs associated with invoice factoring, it’s an effective solution for companies that have a profitable business model but are currently struggling to pay creditors due to long trade credit periods.
Loans and Financing
If your company has a strong credit history and a profitable business model that allows it to pay back lenders, it might be able to use a loan or line of credit to pay creditors and fix its short-term cash flow issues.
Loans and financing are rarely available to companies that have cash flow issues that are the result of a bad business model. However, they are great solutions for otherwise profitable companies that need a short-term injection of cash.
While financing is often an expensive way to solve your company’s short-term cash flow problems, with relatively high interest rates the norm, it’s a desirable solution for companies with a history of steady, profitable trading.
Company Voluntary Arrangement
Is your company insolvent as a result of its cash flow problems? When a company is completely out of cash and unable to pay its debts as they become due, it’s cash flow insolvent and needs to take action to maximise the interests of its creditors.
A Company Voluntary Arrangement, also known as a CVA, is an insolvency solution that allows your business to negotiate a long-term payment contract with creditors to pay some of its debt over a fixed period of time.
During a CVA, your company will make monthly payments to its creditors. Some of its debts may be written off as part of the arrangement to ensure your company can comply with the terms of the CVA without its cash flow being negatively affected.
Since a CVA usually offers the best outcome for both creditors and your company, it’s a good solution if your company has short-term cash flow issues but still has a profitable business model that allows it to continue trading.
If your company is under pressure from its creditors and faces the possibility of being wound up, administration can shield it against legal action and create a path towards financial recovery.
In a company administration, an insolvency practitioner takes over administration of your company. Throughout the administration period, the administrator works to maximise the interests of your company’s creditors.
In some cases, you might be able to use a pre-pack administration sale, which is an asset sale that allows certain aspects of your business to be continued – during the administration process.
Like a Company Voluntary Arrangement, administration is a solution for companies that are insolvent, whether via cash flow or balance sheet. It’s also a public process that could potentially affect your company’s reputation.
How to prevent cash flow problems from occurring
Entering into a CVA or administration or using financing options to improve your company’s short-term cash flow can prevent a cash flow crisis from resulting in the closure of your business.
However, it’s important to take long-term steps to address cash flow problems to prevent them from affecting your company. The following tips can help prevent a second cash flow crisis from affecting your company’s solvency:
- Make cash flow management a major priority that’s given daily attention, instead of an aspect of your company that’s only monitored infrequently.
- If your company is spending more than it can afford to at its current profits, implement cost-cutting measures to improve its financial condition.
- If your customers frequently pay invoices behind schedule, implement a more effective debt collection system to create a steady, predictable flow of cash into your company.
- If your company’s business model isn’t producing sufficient revenue, make changes to improve your company’s sales and improve its long-term financial condition.
- If you’re the sole shareholder in your company and depend on it as a source of income, reduce the amount of cash you take out of the company in order to improve its financial viability.
Get expert financial help
If your company is struggling with cash flow problems, you need to seek immediate help to prevent them from affecting its ability to pay staff, suppliers and creditors in the near future.
Ignoring cash flow problems might seem like the easiest short-term solution, but it will quickly lead to your company facing legal pressure from its creditors to pay its debts or face compulsory liquidation.
It’s extremely likely that a solution is available to help your company solve its cash flow issues, fix its finances and keep trading. We can help you explore the solutions available to your company and solve its cash flow problems for the long term.
Contact us to speak to an insolvency expert and learn more about the options that are available to improve your company’s cash flow. We can provide proven advice and assistance to ensure your company takes the best steps towards recovery.